What do new Investors need to know about speculation in the Forex Market? – Capital FM Kenya

The foreign exchange market, is the largest financial market in terms of active trading volume, with a daily turnover of $6.6 trillion as reported by BIS (Bank for International Settlements) in their report published in 2019.

Forex market is a 24-hour market place where investors can trade currency pairs. Apart from banks and corporations, now individual retail traders can also buy, sell, and speculate on the international market’s currency exchange rates.

By predicting the future price movements in exchange rates of currencies, investors can make a profit out of a trade.

Recent trends data published by Forex Brokers SA suggest that African retail & professional investors are increasingly participating in the forex & other financial markets. More developments in regulatory mechanisms coupled with low-cost internet and smartphone penetration have made Africa an attractive destination for online forex brokerages & retail trading apps.

It is estimated that there are over 1.8 million active traders in Africa in 2021, the majority are from South Africa, Nigeria & Kenya. Except for South Africa and Kenya, almost all countries in Africa don’t have any regulatory framework for online forex trading.

Despite the CMA’s regulation in Kenya, there are risks that new retail investors need to know, and mistakes they must avoid while trading in the forex market.

Who regulates Online Forex Trading? 

Despite the colossal size and international exposure, there is no single body that regulates the entire forex market as the market is decentralized & over-the-counter.

However, individual countries create their own regulatory mechanisms to implement currency controls and also to protect the interest of the investors & participants who trade in forex markets. Similarly, the regulations also exist in many countries to provide oversight on the online/retail forex investments & CFD instruments which most small investors trade in.

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A regulated online forex brokers will follow strict compliance mechanisms like periodic audits and evaluations for maintaining industry standards. It also gives assurance to the traders about the liquidity and robustness of the platform.

As per trade volumes published by Forex Brokers, South Africa is the largest forex trading market in Africa with $16.53 billion USD daily volume in January 2021. The Financial Sector Conduct Authority (FSCA) regulates the financial industry and the forex market in SA. FSCA issues ODP (Over-the-counter derivatives provider) licenses to retail brokers and regularly checks the trading practices followed by the regulated brokers to ensure investor protection. Apart from that, FSCA also undertakes investor education initiatives.

Kenya is the only market in Africa after South Africa to regulate retail forex trading and brokerages. Like FSCA, Capital Market Authority (CMA) licenses the online forex brokers looking to operate in Kenya, and supervises them. Kenyan retail traders must only trade with CMA regulated forex brokers for security of their funds & grievance redressal in case of any dispute with the broker.

 

Why choosing the right Forex Trading Platform matters & what to look for?

All trading activities are mostly carried out online via the broker’s website and their app. These platforms vary in multiple facets ranging from brokerage fees to regulatory adherence.

Investing through a regulated broker will give the trader confidence that the funds are secure & there is no conflict of interest. The number of brokers and trading platforms are rapidly growing; the broker has to be chosen circumspectly by filtering through a staggering number of advertisements and web promotions.

Some of the critical factors to be considered are:

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  1. Regulatory Compliance

The forex market is a risky and volatile marketplace. The absence of a uniform governing body gave an open letter to specific institutions and individuals to manipulate the market in unethical ways.

Regulatory bodies in different countries act as a resistance to this practice.

Regulatory bodies protect investors and the public from fraud and manipulation. A broker and an app adhering regulatory framework sends out a clear message that the system has checks and balances present to counter unethical trading practices and the loss, and regulatory oversight by the regulator.

The professional-looking website does not guarantee adherence to regulatory compliance.

Presently, there are only two countries in Africa that have robust regulatory bodies I.e.: FSCA or South Africa & CMA of Kenya.

Retail Traders in Kenya must only check/look for CMA licensee broker or FX apps while selecting the trading platform for enhanced safety. Similarly for traders in SA, their choice/option must only be FSCA regulated forex brokers that offer forex investments or derivatives due to safety & oversight of local regulatory authority.

  1. Leverage

Brokers vary in providing account services. There is no standard leverage offered by brokers in the retail forex & CFD market. Hence, different brokers offer different rates of leverage for forex & other instruments.

For instance, if the leverage ratio is 1:50, it translates that a trader with an account size of $1000 can open upto $50,000 trading position. Leverage can enhance profits on winning trades but attracts magnified losses on losing trades.

 

  1. Commission & Fees

Commission and spreads charged by brokers are also different. Some brokers charge a fixed commission on the difference between ask and bid price, while others have a specified rate commission on every executed trade (spreads). Major currencies have more tighter spreads, and minor, exotic currency pairs normally have higher or wider spreads.

Making profits with wider spreads is comparatively hard in the forex market, as you would have to pay more to the broker before you can go into profit.

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  1. Deposit Requirements

The minimum deposit for a forex account can be as low as $5 onwards with Kenyan forex brokers like FxPesa,  PepperStone, Scope Markets & FXTM.

It is up to each individual trader to decide how much the initial deposit they want to make for opening an account. But it is advised to have a sizable capital so that you don’t over leverage your positions.

  1. Deposits and withdrawals:

Deposit and withdrawal policies are different from different brokers. It is advised to select a broker with high ease of withdrawal and deposit options. The withdrawal charges must also be considered.

  1. Range of Trading Instruments

There are major currencies and minor currencies in the forex market. Brokers offer various pairs of currencies & CFD instruments like commodities, indices etc.

But the most critical factor that traders should consider is whether the instrument of interest to them is available in the broker’s app or not.

  1. Customer service:

Since forex is a 24-hour business, it is advisable to select a broker whose service is available around the clock via phone, live chat & email.

There will be times when investors need concise answers about spreads, leverage, withdrawals and regulations. Speaking with a live representative will avoid the time cost and frustrations arising from an auto attendant or a chatbot.

In general, brokers with large trade volume and size will have better customer service and access to better prices.

  1. Trading App

The robustness & ease of use of the trading app plays a vital role in carrying out trades.

Visually right platforms with a variety of fundamental and technical analysis tools will create a seamless trading experience. The most vital thing to notice is the panic button’s availability, closing all trading positions in one click.

Trading platforms offering customization and strategy builders will help the traders make easy investment options and educate the traders.

Common mistakes you must avoid in Forex Trading

Investor predictions and the results of technical analysis can often go wrong in trading. However, some common mistakes can be avoided by developing a trading plan and strictly following it.

  1. Risk of averaging down:

Averaging down is the strategy of adding to your position after a further price drop. By employing this strategy, the second purchase will reduce the average price of the investment.

Though sometimes this is a good strategy, over-reliance on this & over leveraging will lead to faster margin call & more capital will be required to stay liquid, thereby crippling the capital.

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  1. Pre or Post positioning:

Speculating on the effects of news on the market is essential for traders looking for more volatility. However, holding pre-position trades before a news can be disastrous. The market can react in either way to a piece of news. Traders must stick to a trading plan and not be oversensitive to the news.

 

  1. Risking more capital:

Risking more portion of capital than the reward on a single trade is a commonly accepted trading practice among day traders. But this can lead to bad consequences when you are wrong, you could lose more than you may be willing to lose initially.

Practicing safe trading strategy with proper risk management will reduce the impact of losses arising from single trades.

 

  1. Use of Leverage is very Risky

Most traders use very high leverage, and brokers offer as high as 1:2000 leverage. One of the biggest risks of trading with high leverage that it can magnify your losses when you are wrong.

Leverage allows you to trade with higher capital than you hold in your trading account, by borrowing it from your broker. But over-leveraging can lead to losing big, and many regulators like FCA, ASIC, ESMA have warned against its risks, and also put restrictions in the leverage that can be offered by brokers in EU, Australia & UK.

CMA licensed brokers can still offer as high as 1:400 leverage for forex. It is up to the traders to not use that high leverage, and not use more than 1:10 leverage.

  1. Killing unrealistic expectations:

Forex trading is classified as a risky instrument, and the potential of earning more wealth in a relatively short time is higher. However, the potential for losses in short period is also higher.

One needs to be aware of the risk and potential downfalls of trading. Keeping realistic expectations regarding trading will alert the traders while making bad decisions in the urge for higher profit rates.

Forex trading comes with obvious risks and unpredictability. Traders must take into account the risks arising from market exposure while using highly leveraged trade positions.

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